Accounting: How to Determine Expenses
Businesses have a responsibility to keep accurate records of income and expenses. In accounting terminology, "expense" refers to the outflow of cash or assets from the company to a third party, either another company or a person. As such, when an expense is incurred, it is common to say that an asset has been "used up" or, if the business owes someone, a liability has been incurred. When determining expenses, the business can divide its outflows into three categories.
Operational expenses are the ongoing costs of keeping an organization in business. This includes advertising, salaries, insurance costs, travel expenses, supplies, maintenance and property management. Operational expenses can be determined by calculating the day-to-day money and resources it takes to run the business. Some of these will be fixed costs, such as rent or salaries, while others are variable, such as travel and supplies.
The counterpart to operational expenses are capital expenditures. These are expenses that the company incurs in creating some sort of future benefit. If the company spends money to buy or improve its premises, purchase equipment or repair existing property, these are considered capital costs. These are referred to in accounting as investments in plant, property or equipment. They are not day-to-day expenses, and their value is seen as having a long-term effect.
Financing costs are expenses the business incurs when borrowing money. This is the price that a bank or other financial lender charges the company in the form of interest and fees. Like capital expenditures, the costs of financing are not incurred on a daily basis and they do not create long-term value for the company. Normally the costs of financing are tax deductible.
Businesses produce an expense report to show how much money or assets flowed out of the company. The expense report shows all of the expenses the company can incur as a result of being in business. In addition, the report might be broken down by department or individual. So the business owner might have her own expense report detailing all of the money spent on her travel, meals, transportation or other business-related expenditures. The compiled expense report is used to track profit -- income minus expenses -- as well as to show board members, stakeholders and managers an accounting of the company's financial well-being.